Industry Insights

In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-08, Testing Goodwill for Impairment.

The main provision in this ASU allows an entity to first assess qualitative factors to determine whether the first step of the two-step goodwill impairment test is necessary. The entity would not be required to calculate the fair value of a reporting unit unless the entity determines it is more likely than not the reporting unit’s fair value is less than its carrying amount. In addition, the entity would no longer be permitted to carry forward the detailed calculation of its fair value from a prior year, as permitted under previous guidance.

The ASU applies to all nongovernmental entities, both public and nonpublic, that have goodwill reported in their financial statements.

Initial Qualitative Assessment

The amendments allow an entity to first perform a qualitative evaluation to determine whether events or circumstances lead to a determination it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If, based on this evaluation, the entity determines it is not more likely than not that the fair value is less than the carrying value, performing the two-step impairment test is not necessary. If the entity determines otherwise, it would be required to proceed to the first step of the two-step impairment test. The remaining requirements are consistent with current goodwill impairment guidance.

Opting Out of Initial Qualitative Assessment

The ASU provides an entity the option, on the basis of its discretion, to bypass the qualitative assessment for any reporting unit in any period and proceed directly to the first step of the two-step impairment test. If the entity does opt to bypass the qualitative assessment in one period, it may resume the qualitative assessment in any subsequent period.

Examples of Events or Circumstances

The ASU provides examples of events or circumstances the entity should consider when evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including the following:

• Macroeconomic conditions, such as a deterioration in general economic conditions
• Industry and market considerations
• Cost factors, such as increases in raw materials, labor or other costs with a negative effect on earnings and cash flows
• Overall financial performance
• Entity-specific events, such as changes in strategy
• Change in composition or carrying amount of net asset
• Sustained decrease in share price

None of these examples are intended to represent standalone events or circumstances necessarily requiring an entity to perform the first step of impairment testing. In addition, the examples are not intended to be all-inclusive, and the entity may need to consider other relevant events or circumstances.

The above examples replace the examples of events and circumstances within the previous guidance used to evaluate whether a goodwill impairment exists when the carrying amount of the reporting unit is zero or negative. These examples also replace the examples of events and circumstances any entity should consider when evaluating the need to test for impairment between annual tests.

Carryforward of Fair Value Calculations

The ASU amendments no longer permit an entity to carry forward its detailed calculation of a reporting unit’s fair value from one year to the next, as permitted under previous guidance.

Impact on Disclosure Requirements

The ASU amendments do not require the quantitative disclosures about significant inobservable inputs used in fair value measurements required by Topic 820, Fair Value Measurement.

Illustrative Flowchart

The following flowchart helps illustrate the optional qualitative assessment and two-step goodwill impairment test. The chart describes the additional qualitative assessment and illustrates the overall impairment test process.

Effective Date & Transition Requirements

The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011 (the issuance date of this ASU), if an entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. The guidance should be applied prospectively.

Considerations

When performing the qualitative assessment, the entity should consider the need to document their qualitative assessment and the rationale for their conclusions about whether the fair value of the reporting unit is not more likely than not less than the carrying value (leading the entity to conclude it does not need to perform the two-step impairment test). This documentation may include:

• Identification of events and circumstances used in the qualitative assessment
• Analysis of how significant each key event or circumstance identified could be to the estimated fair value of each reporting unit
• Analysis of any positive or mitigating events or circumstances that may affect its conclusion, including the estimated impact on the fair value of each reporting unit
• The process for analyzing and reaching the qualitative assessment conclusion
• Identification and analysis of changes in key events and circumstances in subsequent reporting periods

There are no changes to current accounting guidance for testing indefinite-lived intangibles for impairment.

To learn more about how these changes could affect your organization, contact your BKD advisor.